Recently I traveled with my wife to visit her friend and family. The parents of this friend own a hotel, and I was very interested in seeing how a hotel is run. I have hosted many live training events over the years, and although I’ve got some idea of how a hotel business is run, I was looking forward to getting a behind-the-scenes view.
This friend’s parents were an older couple, and they had owned the hotel for about 7 or 8 years. When they first bought it, there was a large staff to manage everything, a busy on-site restaurant, a popular night club, and more. Fast forward to today, and things have changed drastically.
When I arrived, I was surprised to find that although the hotel was located in a nice, historic area of town, it was rated only 2 stars. Apparently only hotels that are not operating are given a 1-star rating, so this was one step up from that. Not a good sign!
But that’s not all…. the night club was closed down, the on-site restaurant was closed, no room service was available, and this friend’s parents managed the entire hotel by themselves, with only 1 or 2 part-time staff to help out. This historic hotel had gone from booming to barely surviving in the span of only a few years. In fact, this friend’s parents hadn’t had a break from their hotel business in YEARS.
Touring The Hotel
After getting to know this older couple, we finally had a chance for the grand tour. Here’s a quick overview of what we got to see…
- Hotel rooms – This hotel was 3 floors and had a variety of room sizes, including some that had 3 beds! It was interesting to see the room layouts and how some room types would cater to certain types of customers. For example, the 3-bed rooms were very popular with large families and hockey teams.
- Kitchen – The kitchen was large and featured huge commercial-sized ovens and stoves. It included rear access for delivery trucks, and small service elevator to bring food up to the various floors. Room service was no longer being offer, so this kitchen was largely unused, except for occasions where they were hosting special groups of guests
- Pool – Surprisingly, the hotel even had a large pool basement! But it was no longer being maintained, so it just sat empty and unused.
- Electrical System – I have a background in electronics, so I’m always fascinated to see old electrical equipment… especially the kind that lasts 50 years without maintenance! This hotel included a HUGE electrical panel that was used to service the entire hotel and all the heating and air conditioning units in each of the rooms. It was very cool to see!
- Ventilation System – As with any big building, duct work ran throughout the entire structure, all being serviced by a massive heating and air conditioning system. The main unit was on the roof, with duct work and piping coming down to the basement.
- Maintenance Area – If you’re ever owned multiple rental properties, then you’ve probably collected spare parts – doors, windows, screen, extra paint, and more. Now multiply that times 50 or 80, and you have an idea what the maintenance area looked like. It felt like a used parts store, where I could walk down the isles and pick what I wanted to buy.
- Hot Water – There were 3 absolutely HUGE water tanks (and when I say huge, I meant at least 12 feet tall). They had been mostly replaced by a small 5 foot hot water boiler (very small in comparison and very efficient), and one of the big tanks were used as extra capacity. Being near those huge water tanks made me feel very small and it felt a bit surreal… like something you see only in the movies.
- Laundry – Commercial washers and dryers lined the walls and were used to clean bedding, towels, and more. This was still a very actively used area, as the rooms still needed to be serviced.
- Elevators – There were 2 elevators: one service elevator in the kitchen, and the main one in the lobby. The hotel was old, and I guess they didn’t have much room to install an elevator. It was so small, I don’t know how more than 1 or 2 people brought their luggage up to their rooms! Three of us managed to fit, however, and somehow 8 guys did too — I saw them step off the elevator, heading out to party for the evening. I have no idea how they all fit in there.
- Conference Rooms – There were a few smaller conference rooms in the basement, but by far the biggest and best ones were on the main and other floors. Some of these rooms were so big, they took up almost 1/3 of the entire floor. Incredibly, there were NO support beams in the middle of these rooms, which goes to show you how strong the structure was (poured concrete and steel I believe)
Overall, I really enjoyed the tour. It was great to see old architecture and get a behind-the-scenes look at how a hotel business was run.
Joint Venture Profits Gone Bad
After the tour, we began talking about the financial aspect of running the hotel. I asked the older man why he didn’t run the night club, offer room service, and rent out the conference rooms.
Apparently he did occasionally rent the conference rooms out for big events (like company parties and weddings), but he’d been taken advantage of too many times by unscrupulous ‘partners’ for other aspects of the business.
- He teamed up with a lady who ran the nightclub for awhile. When it came time to pay, she always had excuses why she didn’t have the money. Yet she kept driving nicer and nicer cars, until one day she just left and the nightclub shut down.
- He teamed up with a company to sell liquor at conference room events. The company sold alot of liquor, but because he didn’t control the cash, he was never paid what he was owed
These were essentially ‘joint ventures’, where two individuals or companies would joint forces to accomplish more than they could on their own. Unfortunately, they were not structured properly and the partners were a poor choice, which led to fraud on multiple occasions.
There were other stories, but I’ll spare you the details. To make a long story short, he had been burned badly in quite a few of these types of joint ventures, and he didn’t want to try them again. Yet he and his wife couldn’t keep doing all the work themselves.
The end result was that business at the hotel kept slowing over time, and he was forced to begin scaling back, laying off staff, and closing down amenities until he was at the point where it’s at today.
How I Would Turn Things Around
I’m the first person to tell people that I am NOT an expert at hotel management. However, I felt really bad about the situation and I wanted to help.
Here are some of the things I suggested to them, things that I would do if I was owned this hotel and wanted to turn it around…
- Rent out more conference rooms – The conference rooms were in good shape overall, so I would step up my marketing to rent those out to businesses and people looking for a venue.
- Offer alcohol at conferences / events – Although the owner tried doing this once before by joint venturing with an outside company, he left too much at the discretion of their staff. Since it was his hotel, he should have controlled the flow of money (and he lost because he didn’t). If it were me, I would sell tickets for alcohol and then let the outside company staff handle the serving. That way I would collect the money, and once all the alcohol used was accounted for, I would pay them any net profit owed.
- Offer catering at conferences / events – The owner had tried doing this as well, but had a bad experience due to the way it was structured. If it were me, I would find an outside catering company to supply food and service. They could even use the existing kitchen as a prep area. Any agreed upon price would be marked up by a percentage to allow for my profit. I would then bill the person/company renting the venue at my price, and the catering company would invoice me at their price. Any difference between the two would be my profit, and I would control the money the entire time.
- Open the night club – Since it would be difficult to control the cash in a night club, I would lease out the space to a third-party to run it. That would provide me extra profit for space that otherwise is sitting empty. And if they don’t pay, I lock the doors! (commercial leases are much different than residential)
Most of these ideas require no money out of my pocket, are relatively risk-free, and only take a little bit of my time. It might take some time to find good joint venture partners to work with, but once I do, the extra profit would be pretty much guaranteed. I could then reinvest the cash into hotel upgrades, hiring staff, re-opening amenities, and more.
A Different Kind of Joint Venture
The types of ‘joint ventures’ that I’m talking about are very different from what most real estate investors are accustomed to hearing. When a real estate investor hears the words “Joint Venture”, they immediately think of using other people’s cash and credit to buy property. And that can be an excellent way to buy more property than you could otherwise buy on your own (I’ve used it many many times myself).
However, as you can see from the examples above, joint ventures are not specific to the real estate world. There are many ways other peoples time, money, and resources (such as credit) can be used to create more profit than you could do on your own.
In fact, I’ve been using these types of joint ventures for years in my real estate business to add extra profit to my bottom line. One of my favourite ways that I’ve used these types of joint ventures is to get FREE ownership interests in real estate.
You read that right
I got FREE ownership in property
(in a province I didn’t even live in!)
And it’s all because I learned the power of leveraging other people’s time, money and resources (not just credit).
So remember this story and think outside the box the next time you discover one of your rental properties has negative cash flow. Ask yourself…
- How can I increase the cash flow, not just by increasing rents / decreasing expenses, but also by teaming up with other people?
- Are there other products and services do my tenants use?
- Who do I know who could provide them?
If you open your mind, you may find the answers you receive could mean the difference between making a profit with your property or losing money.